Great Lakes Higher Educ. Corp. v. Cavazos

Decision Date27 September 1990
Docket NumberNo. 89-2748,89-2748
Citation911 F.2d 10
Parties62 Ed. Law Rep. 434 GREAT LAKES HIGHER EDUCATION CORPORATION, a non-profit Chapter 181 Wisconsin Corporation, Plaintiff-Appellant, v. Lauro F. CAVAZOS, Secretary of the United States Department of Education, and United States Department of Education, Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Ann Ustad Smith, James H. Bowhay, David J. Hanson, Michael, Best & Friedrich, Madison, Wis., for plaintiff-appellant.

Neil H. Koslowe, Dept. of Justice, Civ. Div., Appellate Section, Neil H. Koslowe, Washington, D.C., for defendants-appellees.

John E. Dean, Clohan & Dean, Washington, D.C., for amicus curiae Consumer Bankers Ass'n.

Robert E. Jensen, George G. Olsen, Williams & Jensen, Jean Froelicher, Washington, D.C., for amicus curiae National Council of Higher Educ. Loan Programs, Inc.

Before POSNER and KANNE, Circuit Judges, and SNEED, Senior Circuit Judge. *

SNEED, Senior Circuit Judge.

Great Lakes Higher Education Corporation (Great Lakes) appeals in its suit for a declaration that the amendment to the Higher Education Act of 1965 enacted in 1987 violates the Fifth and Fourteenth Amendments. The district court rendered summary judgment for appellee Secretary of Education (Secretary). 711 F.Supp. 485. We affirm.

I. FACTS AND PROCEEDINGS BELOW

In 1965, Congress enacted the Higher Education Act (Act), Pub.L. No. 89-329, 79 Stat. 1232 (1965) (codified as amended at 20 U.S.C. Secs. 1071-99 (1988)), which established the Guaranteed Student Loan Program (GSLP). The GSLP assists students in obtaining low-interest financing for post-secondary education. The program attempts to achieve this goal through three basic steps. First, the government subsidizes interest payments on loans to students made by lenders. Second, a state or state-designated private, nonprofit agency guarantees the loans. Finally, the federal government reinsures the state guarantee agencies. This lawsuit involves the government's reinsurance function.

A state wishing to enable its students to benefit from the GSLP must either establish a state agency or designate a private nonprofit agency to guarantee these loans. In Wisconsin, the designated agency is the plaintiff, Great Lakes, formerly known as Wisconsin Higher Education Corporation. This agency was established in 1967 as a nonstock, nonprofit corporation. Like other guarantee agencies, Great Lakes entered into an "insurance program agreement" with the Secretary. Under this agreement, Great Lakes must pay 100 percent of the unpaid principal on a qualifying loan in case of default or failure to repay by the student borrower. 20 U.S.C. Sec. 1078(b)(1)(G). Moreover, upon entering the program, Great Lakes agreed to conform both to the existing federal statutes and regulations and to new obligations that Congress or the Secretary might impose in the future. 1 Great Lakes consented to these terms in the insurance program agreement, which became effective on March 10, 1977.

The Secretary is empowered under the Act to enter into agreements with the guaranteeing agency for reinsurance and supplemental reinsurance. 20 U.S.C. Sec. 1078(c)(1)(A). For this coverage, the agency must pay the Secretary a reinsurance "fee" that is determined by statute. 20 U.S.C. Sec. 1078(c)(9). The reinsurance agreements provide for a graduated reimbursement schedule; 100 percent reimbursement by the Secretary if the agency's loan default rate is less than 5 percent, 90 percent reimbursement if that rate is between 5 percent and 9 percent, and 80 percent reimbursement if that rate exceeds 9 percent. 20 U.S.C. Sec. 1078(c)(1)(A)-(B). The agreements also stipulate that the Secretary may withhold reinsurance payments if the agency fails to comply with the Act or regulations. Finally, the Secretary is authorized to make two other payments to the agency: cash "advances" to begin operation pursuant to 20 U.S.C. Sec. 1072(a)(1) and "administrative cost" allowances to offset operating costs under 20 U.S.C. Sec. 1078(f)(1)(A).

Great Lakes' assets, which include federal advances, reinsurance payments, and administrative cost allowances, must be deposited into a "reserve fund," 34 C.F.R. Sec. 682.410(a)(1) (1989), which may only be used for GSLP purposes, 34 C.F.R. Sec. 682.410(a)(2) (1989). 2 By 1986, Great Lakes had accumulated $31,680,014 in its reserve fund. Many other guarantee agencies also built up large reserves.

The advantageous financial position of these agencies across the country led the United States General Accounting Office (GAO) in June of 1986 to issue a report discussing the financing of guarantee agencies under the GSLP. U.S. Government Accounting Office, Guaranteed Student Loans: Better Criteria Needed for Financing Guaranty Agencies (1986) [hereinafter GAO Report ]. The GAO found that guarantee agencies had built up huge cash reserves and that these reserves were being used for non-GSLP purposes. GAO Report, at 2-4. The GAO recommended "that the Congress amend the Higher Education Act to require the Secretary of Education to establish ... criteria for the appropriate levels of reserves [that] guarantee agencies should retain, based on the financial risks they face...." Id. at 29. To reduce these large unnecessary reserves, the GAO proposed a formula to determine the maximum allowable cash reserve. 3 Once a maximum level is established for a particular agency, "the growth of future agency reserves [should be restricted] beyond the established levels." GAO Report, at 29.

Congress responded to these recommendations with the Omnibus Budget Reconciliation Act (1987 amendment), 4 which provides guidelines for determining maximum cash reserves and recovery of excess cash in the reserves. The 1987 amendment also made the right to receive reinsurance payments and administrative cost allowances conditional on the agency's compliance with the recovery portion of Sec. 1072(e) unless the Secretary issued a waiver. 5

On February 9, 1988, after the 1987 amendment had gone into effect, the Secretary notified Great Lakes that its excess reserves of $13.49 million must be transferred to the federal GSLP insurance fund pursuant to 20 U.S.C. Sec. 1081(a). 6 Great Lakes neither applied for a waiver nor questioned the allocation of the recovery to the GSLP insurance fund. It simply refused to comply with the Secretary's order to transfer its excess funds and brought this suit on February 26, 1988. The Secretary, in September 1988, began withholding reinsurance reimbursements from Great Lakes. This process continued until January 1989, when the entire $13.49 million had been recovered.

In its suit against the Secretary, Great Lakes sought a declaration that the 1987 amendment was unconstitutional. In a comprehensive order, the district court rejected all of Great Lakes' constitutional challenges and granted the Secretary's motion for summary judgment. It held first that there was no unconstitutional "taking" of private property because Great Lakes entered into contractual agreements with the Secretary which required compliance with future amendments. In the court's view, the effect of the 1987 amendment did not constitute a taking because "the terms governing [Great Lakes' right to reimbursement] could be changed by legislative amendment [and that even though the] effect of those changes could be to lower plaintiff's reserves, ... such an effect does not constitute a taking." The court also rejected Great Lakes' Takings Clause challenge to the method of recapturing excess cash reserves. The court concluded that "defendants are not taking any money in plaintiff's reserves.... [They are] merely requiring plaintiff to use the money already in its reserve fund for Guaranteed Student Loan Program purposes as prescribed by statute and regulation. Neither the implementation nor the effect of the 1987 amendments constitute a taking of plaintiff's reserves."

Second, the court held that the 1987 amendment was not a repudiation of the Secretary's obligation to pay Great Lakes' reinsurance costs and administrative cost allowances. The court determined that the 1987 amendment merely imposed a new condition on the fulfillment of the Secretary's obligations. It concluded that "[b]ecause the obligations are not incurred until the condition is met, there is no debt that can be repudiated." Finally, the court dispensed with appellant's equal protection claim by holding that the 1987 amendment was rationally related to the legitimate legislative purpose of "reducing the federal cost of running the Guaranteed Student Loan Program without materially harming [guarantee agencies]." 7

On appeal, Great Lakes contends that (1) the "confiscation" of 40 percent of Great Lakes' reserve fund constitutes a taking of private property for public use without just compensation in violation of the Fifth Amendment; (2) the withholding of federal payments for reinsurance and administrative cost allowances also violates the Fifth Amendment Takings Clause by abrogating Great Lakes' contractual right to receive them; and (3) the repudiation of reinsurance contracts by the government is an unconstitutional questioning of the validity of a public debt in violation of the Fourteenth Amendment.

II. JURISDICTION

The district court had jurisdiction pursuant to 28 U.S.C. Sec. 1331 (1988); 28 U.S.C. Sec. 1291 (1988) confers jurisdiction over the appeal in our court.

III. DISCUSSION
A. Was the Excess Cash in the Reserve Fund Private Property?

The Fifth Amendment provides that "private property [shall not] be taken for public use, without just compensation." U.S. Const., amend. V. Our first inquiry is whether the reserve fund is "private property." See United States v. General Motors Corp., 323 U.S. 373, 377-78, 65 S.Ct. 357, 359-60, 89 L.Ed. 311 (1945). As a general matter, a holder of private property enjoys the right of "free...

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